Default Retirement Age: Has the sun set on this good leaver provision?
Currently, an employer can specify a default age of not less than 65 by when employees retire. Employees have the right to request to stay longer, and the employer must consider the request, but there is no obligation on the employer to agree.
From April this year, employers may not specify a default retirement age (DRA) other than in exceptional circumstances (DRA notices given prior to 5th April will remain valid until October). ACAS (Advisory, Conciliation and Arbitration Service) has published guidance which suggests that special circumstances could apply to occupations such as the emergency services which require special physical and/or mental fitness. However, since different individuals lose their capabilities at different rates, even this seems open to challenge.
The problem with share schemes
Under the Equality Act 2010, employers may not discriminate against employees on grounds of age. Most employers will therefore choose to scrap the DRA. But many employee share schemes contain provisions that specify retirement as a good leaver reason, effectively allowing a retiring participant to receive scheme benefits earlier than might otherwise have been the case. How can these be reconciled with the Equality Act?
The problem is most apparent in the certain of the government approved schemes, specifically the Share Incentive Plan and SAYE Share Option Scheme. Companies operating these schemes are required by law to include retirement as a good leaver reason. These rules operate slightly differently, as follows:
Share Incentive Plan (SIP): There is no tax on the removal of shares from a SIP if this occurs as a result of retirement. The employer must specify the retirement age in the rules, which must be the same for men and women not less than 50.
SAYE Share Option Scheme (SAYE): The rules must provide that an employee who retires at age specified in the plan (or an age at which the person is bound to retire under their contract of employment) can exercise their option but only within six months of the relevant date, which cannot be earlier than age 60 or later than age 75; otherwise the participant must wait until the end of the original savings contract.
The rules of a Company Share Option Plan (CSOP) must also be approved by HM Revenue & Customs before the scheme is operated. Here, however, there is no statutory requirement to refer to a retirement age or to include this as a good leaver reason. If retirement is a good leaver reason the age cannot be less than 55 years. If the retirement is not a good leaver reason, any early exercise following retirement will result in the option losing its tax advantages.
Changing the rules
Having stated the problem, the solution appears quite simple in principle. In relation to all three of the above schemes it should be possible to change the rules to remove reference to any retirement date as being "normal" or "default". The plan rules should instead just refer to a specific age after which any retirement will be a good leaver reason. In the case of the SAYE scheme, however, HM Revenue & Customs seems to think that retirement doesn't count as retirement unless the employer agrees to a specific date. We hope that on reflection HMRC will agree that there is no real harm in allowing people to retire when they wish to.
Any changes to the rules of the above schemes must be cleared by HM Revenue & Customs before they are introduced. HMRC has indicated that it is not seeking to test scheme rules for compliance with employment legislation and rules which have been approved will remain approved for tax purposes unless changes are made which are not compliant with the tax regulations. HMRC will usually not approve changes that disadvantage participants unless (possibly) the participants themselves agree.
Discrimination in reverse
It might be thought that the ability of retirees to obtain their scheme benefits early results in effective discrimination against younger members of the workforce. Fortunately, the Equality Act contains provisions which allow for other statutory provisions to take precedence, namely the statutory requirements for the Share Incentive Plan and SAYE Share Option Scheme.
Other share schemes (including the EMI and CSOP) are in a different position, however. Here, retirement is a good leaver reason only at the discretion of the employer and is not a statutory requirement. It would seem wise therefore to exclude retirement as a good leaver reason in respect of new awards.
In relation to existing schemes, some sort of discrimination claim is a technical possibility and indeed this has been the case since the introduction of the Employment Equality (Age) Regulations of 2006. However as far as we are aware no claim of this kind has yet been made. The risk could be removed altogether by obtaining the agreement of the participants to the change (though HMRC may not agree in the case of a CSOP scheme).
If you already operate an existing SIP or SAYE scheme, or a CSOP scheme with a retirement provision, the rules will need to be changed to reflect the abolition of DRA (unless, exceptionally, you plan to retain and justify your DRA). If you operate an Enterprise Management Incentive or unapproved scheme with a retirement provision you can just change the rules retrospectively, preferably with the consent of the participants.
If you would like assistance with any of the issues discussed in this article, please contact us on 020 8949 5522 and ask to speak to any one of our advisers.